Market Frictions: A Unified Model of Search and Switching Costs

By Wilson, C.

Abstract. Despite the existence of two vast literatures, very little is known about the potential di¤erences or interactions between search and switching costs. This paper demonstrates the bene…ts of examining the two frictions in unison. First, the paper shows how subtle distinctions between the two costs can provide important di¤erences in their effects upon consumer behaviour and market prices. In many cases, policy makers may prefer to reduce search costs rather than switching costs. Second, the paper illustrates a simple methodology for estimating the magnitude of both costs while demonstrating the potential bias that can arise from a single-cost approach.